Post-GST impact on FMCG sector

The fast-moving consumer goods (FMCG) segment is the fourth largest sector in the Indian economy. It has grown from US$ 9 billion in FY 2000 to US$ 49 billion in FY 2016-17 and has an expected compound annual growth rate (CAGR) of 20.6 percent to reach US$ 103.7 billion by 2020, according to the India Brand Equity Foundation’s July 2017 presentation.

Within the FMCG sector, food products is the leading segment, accounting for 43 percent of the overall sector. Personal care (22 percent) and fabric care (12 percent) come next in terms of market share. Growing awareness, easier access, and changing lifestyles have been the key growth drivers for the sector.

With this sector growing at such a rapid pace, many businesses would like to know how the post-Goods and Services Tax (GST) scenario looks for FMCG. Will FMCG benefit from GST or not? Will the prices of goods increase or decrease? Who will bear the ultimate tax burden?

The total current tax rate for the FMCG industry is around 22-24 percent. Under GST, the tax rate comes to an average of 18-20 percent. Let’s look at how the new tax rates under GST impact major products within the sector:

Companies such as Patanjali, ITC, HUL, and Marico are either slashing the prices of goods or increasing the volume of the product on dispatches made from 1 July onward, extending the tax benefits to consumers under the GST regime. In particular, HUL has slashed the price of its detergent soap Rin bar of 250 gm from Rs 18 to Rs 15 and increased the weight of its Surf Excel bar costing Rs 10 from 95 gm to 105 gm.

Lower prices could potentially support volume growth for certain products, particularly in the rural segment. “We believe it could result in a faster consumption shift from unbranded to branded products, spurring volume growth for FMCG companies. Simultaneously, it will also bring operational efficiency with rationalization of supply chain by removing bottlenecks,” says Sanjay Manyal, Analyst, ICICI Securities. He also pointed out that tax exemption provided to several critical products required for food processing — jaggery, cereals, and milk — would benefit this industry.

Wondering who will gain and who will lose from the new GST structure? Companies such as Marico will benefit from the change in the rates of edible oil, and the rates of hair oil have decreased in their favor as well. Colgate-Palmolive will also gain under GST, as toothpaste will become cheaper now.

On the other hand, gifting dry fruits on festivals will become an expensive affair now as the rates have increased from 4-5 percent to 12 percent. Also, the rates of dairy products like ghee, butter, and cheese have increased from an average of 4-5 percent to 12 percent. Companies like Amul and Nestle will likely revise prices on their products as a result of GST.

• Reduction in logistics costs: The FMCG sector will also benefit from GST by saving a considerable amount of expenses on logistics. Distribution costs for the FMCG sector currently amount to 2-7 percent of the total cost, but are expected to drop to 1.5 percent after implementation of GST software. Due to the smoother supply chain management in regards to paying tax, claiming input credit, and removing CST under the GST regime, there will be a cost reduction in terms of transportation and storage of goods. The reduction in taxes and distribution costs should enable companies to lower prices on consumer goods.
• Increase in effective tax rates: Aerated beverages have been placed in the highest tax slab of 28 percent and will now attract an additional tax of 12 percent. Beverage companies have said the effective tax rate of 40 percent on sweetened aerated water and flavored water under GST is against the stated policy of maintaining parity with the existing weighted average tax, which is significantly below 40 percent.

“This increase will have a negative ripple effect and hurt the entire ecosystem of farmers, retailers, distributors, and bottlers in India. This increase in tax will further limit the growth of the beverage industry,” said the Indian Beverage Association (IBA) in a statement.

There are some instances where the tax rate under GST is higher than the present tax rates, and in such cases, several dealers could increase their stock levels in the run up to GST. On the other hand, in those cases where the GST rate is lower than the current tax rates, dealers would try to keep minimum stock and dispose of non-moving stock before the onset of GST.

Since different products are taxed at different rates, on a macro level, the average tax and the final prices that the end customer ends up paying will average out, with some products becoming more expensive and others becoming cheaper.

Ultimately GST impacts the FMCG sector by readjusting tax brackets and reducing distribution costs for various companies. Some companies will “gain” with lower taxes and distribution costs, and thus may respond by increasing product volume and lowering prices, while others may “lose” with higher taxes, and thus need to compensate by increasing prices.

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